Don't let it get away!

Apple (NASDAQ: AAPL) shares have been taking a beating this year. Fear has crept into expectations that the purveyor off all things iRelated isn't going to deliver a blowout holiday quarter when it reports on Wednesday. As a result, Apple has underperformed the Nasdaq Composite Index by more than 9% year to date. One school of thought suggests a dividend hike is just what Apple shares need to find some relief.

Bernstein Research recently analyzed 800 mutual funds to support the notion that growth funds are reducing Apple's exposure and value funds have yet to make a full commitment. In December of 2011, 82% of growth funds owned Apple at an average of 1.3 times its weight in the Russell 1000 Growth Index. Fast-forward a year later and only 77% of the same growth funds hold Apple, but hold it at 0.9 times the weight of the index. On the value side, only 29% of funds held Apple shares in December of 2011, with an average weight of 0.4 times its weight in the S&P 500. Although this number increased in 2012 to 40%, the average weight among funds remained unchanged. A dividend raise would naturally increase Apple's appeal for value and income funds.

$250 billion reasonsBernstein estimates Apple's cash balance is going to explode from $121 billion today to $250 billion in three years' time. The firm makes the case that Apple could double its dividend rate or authorize a large-scale buyback (10% of float) and would only spend an additional $50 billion over a five-year period. Obviously, the cash needed to fund a dividend hike isn't the issue. It's a matter if it's the right use of capital, especially since Apple has only paid out two dividends since approving this recent measure. Consequentially, investors may become disenchanted that Apple authorized an additional dividend hike, a telltale sign the company is literally out of ideas on how to put its capital to work.

Easy to overlook Investors may be overlooking that fact that Apple's cash balance is currently being invested, earning some sort of return, and is compounding over time. Shelby Davis, the investor who turned $50,000 into $900 million dollars over a 50-year period, made his fortunes off of companies in similar situations as Apple. Focusing primarily in insurance, he would identify companies with large cash reserves to act as unrecognized "compounding machines," which the market deeply discounted. Over the long term, the market would slowly recognize this value, earnings would continue to grow, and eventually shares would experience tremendous P/E multiple expansion. Considering its massive cash balance and the fact that Apple currently trades at nearly a 50% discount to the S&P 500, could Apple be a "Davis Double Play" in the making? If this were the case, long-term shareholders would benefit far greater than a dividend double-down.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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"Consequentially, investors may become disenchanted that Apple authorized an additional dividend hike, a telltale sign the company is literally out of ideas on how to put its capital to work."

Apple is in the enviable position that it generates so much cash it could not possibly find better uses for all of it. Apple does need to at minimum double the dividend. That would be a payout ratio of just 40% and the cash hoard as absurd as it already is continues to grow an astonishing 30B per year with the principal of 130B today untouched!

Apple has mismanaged its cash in the most horrible way. Earning about 1% against a backdrop of 3% inflation. It is losing billions per year in buying power. This cash should be distributed to shareholders.

The main reason I believe apple stock has lost 1/3 of its value is because it is not shareholder friendly. The 10B buyback over 3 years is about 3/share per year. A pittance that merely offsets option grants.

The dividend at this rate would take 10 years just to get back $100 gross. After tax this would be 80 to most investors. That is a long 10 years.

The number has to be large enough to move the needle. $20/share is the smallest. $25/share at 50% payout ratio is better and they still add 25B to the balance sheet per year assuming zero growth going forward.

Until apple is friendly to shareholders the paper it trades it merely a ponzi paper in hopes the next guy pays more. apple needs to open up the kitty and start a real dividend and a major buyback. If they have to borrow 50B to 100B to buyback up to 20% of the float that is fine. They can afford it and not touch offshore cash.

Warren Buffett would be sick to see what a waste that 130B has been sitting in the bank eroding to inflation.

Meanwhile most of the executives and board hold no shares to a few hundred to a few thousand. It is no wonder they have little interest in the dividend or share price. Once their options vest they blowout of them. A better market signal would be if they owned substantial stakes in apple that they could sell today but choose not to. Very different from options you can't sell, until you can, and then do.

Sending report...

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